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PlayStation 3 costs Sony dear

Huge losses will be difficult to recoup, admits games division

Each PS3 console cost $800 to manufacture when it was launched in 2006

Sony's games division is haemorrhaging cash because the PlayStation 3 console
cost so much to develop and make that the company will find it difficult to
recoup its losses.

It is not unusual for consumer electronics manufacturers to pour money into
research and development, sell at a loss when a new product is released and make
up the deficit with high-volume sales in subsequent years.

However, the magnitude of Sony's PS3 losses, and the length of time it will
take to recoup them, have startled games sector analysts.

Sony's admission that clawing back the cash will have a negative impact on
the group's financial results for some time came to light in its
most
recent filing to the US Securities and Exchange Commission.

The Form 20-F filing, which is mandatory for non-US companies with US-based
shareholders, revealed losses in the year ending 31 March 2007 (the first
financial year in which the PS3 figured) of ¥232.3bn (£1.09bn).

Although this figure is high, a substantial loss is to be expected. R&D
costs for the relatively simple PS1 launched in 1996 were estimated at close to
$500m (approximately £350m then).

But the PS3 was a far more ambitious product. Sources close to the company
estimate that each PS3 console cost $800 to manufacture when it was launched in
2006, let alone multi-billion dollar R&D costs.

That production bill will have reduced as Sony refined the manufacturing
process. But losses for the year ending 31 March 2008, by which point over nine
million PS3s had been sold, were still running at ¥124.5bn (£585m).

The PS1 and PS2 will have paid back their R&D and early manufacturing
costs because they sold in such high volumes over a long period of time.

While this business model has been standard among consumer electronics firms,
the problem for the PS3 is that product cycles are becoming shorter as
competitors leapfrog and customers become more demanding.

This leaves fewer years to recoup R&D losses with high-volume sales.

Howard Stringer, chief executive at Sony, stated last week that returning the
games division to profit is a top priority for Sony.

Sony will look to recoup losses on sales of consoles and software. Currently
PS3s are on sale for between £310 and £350, depending on which games the
retailer has bundled with the console.

Popular PS3 games sell at between £30 and £40, and less popular titles as low
as £15. After retailers and distributors have taken their cut, Sony is likely to
make anything from 40 to 75 per cent margin on these sales.

At this rate, the PS3 may never be anywhere near as profitable as earlier
PlayStation models.

However, with every console sold Sony is also seeding homes with Blu-ray
players for which it can sell Blu-ray DVD movie titles at much higher margins.

Thus, while the games division loses money on PS3s, the benefits to other
parts of the Sony empire may outweigh the losses.